10/03/2000 @ 12:18PM

Corel Sells Out To Microsoft

It isn’t quite as strange as
Microsoft
‘s investment in
Apple Computer
several years ago, but it ranks right up there.

Last night,
Corel
and Microsoft
announced a joint-development and marketing alliance, which includes a $135 million Microsoft investment in Corel. The companies said that Corel would develop and market applications for Microsoft’s sprawling .Net initiative, which is based on Windows technologies.

While the investment is paltry by Microsoft standards, the implications are huge. For starters, what becomes of Corel’s Linux plans? Corel has poured considerable resources into its Corel Linux operating system and porting its business and graphics applications to Linux. The company has positioned its Linux efforts as the linchpin of its comeback strategy, but there was no mention of Linux on the conference call Monday.

Although it now owns about 24 million Corel shares, Microsoft has no official control over the company. It has no voting rights, no board seats and will have no role in management. But with 320 fewer employees–Corel laid them off this summer to cut overhead–and a consolidation of engineers from Dublin to Canada, Corel might not have enough resources to devote its energies to both Linux and .Net development.

With Microsoft providing some of the bankroll, which avenue will Corel choose?

Secondly, the deal likely vaporizes whatever competition is left in the business applications market. Microsoft has the dominant market share of Office suites, with Corel and Lotus trailing in the single digits. The Microsoft-Corel deal could open a window for
Sun Microsystems
to create momentum for its Star Office suite, which is available as a free download on its Web site.

Microsoft and Corel have been fierce competitors since the latter bought the WordPerfect Office suite of applications from
Novell
in 1997. Corel’s profit margins suffered when it undercut Microsoft software prices in a bid to gain market share. It hitched its wagon to Java office suites and then dropped development. Then it got into the hardware business by building network computers. But that didn’t last long either.

Corel’s stock soared last year when it got into the Linux market. Then it dropped like a rock when Corel couldn’t figure out how to make money with Linux. Several Corel senior executives quit while the company laid off more than 20% of its employees and quickly burned through $25 million from a Canadian investment group. The biggest shoe finally dropped in midsummer with the resignation of founder and Chief Executive
Michael Cowpland
Michael
Cowpland
.

Investors like this deal, however, sending Corel’s stock up 53% to about $5 in late morning trading Tuesday.

There has been rabid speculation since last year that Corel would be taken over by another software company, perhaps a Linux concern. After all, Corel’s Linux OS has garnered positive reviews, and its distribution channel is broader than that of most Linux companies.

It’s impossible to know what went on behind the scenes. Perhaps moneylosing Linux companies didn’t see the benefit in buying another moneylosing company.

One thing is clear. Linux stands to become the latest in a string of abandoned revival strategies for Corel.